Gold News

The Road to Economic Plan Z

There's a lot of bear market left ahead of us...

WHEN THIS crisis first kicked off back in 2007, people thought we might be in for a little setback, writes Bill Bonner, founder of the Daily Reckoning.

They couldn't imagine any fundamental change happening. As far as they could tell the economy had been expanding for nearly 30 years with only minor periods of sluggishness. And the last 5 years had seen the biggest housing boom in history. Electricians worked night and day trying to keep up with it.

And who doubted that America's financial system of buy now/pay later was the best form of capitalism ever created? As for America's political system, was it not the crown of creation?

The rich were getting fabulously richer. But who cared? Everybody was getting richer. Everybody's house was going up in price. If you wanted money all you had to do was to take out some of your accumulated equity.

Everybody was getting a bigger house and more stuff. Life was as good as it gets.

Then, in 2008, when Lehman Bros. went broke it became obvious that something was wrong. People began to refer to a "liquidity crisis." Everything was fundamentally solid, said the authorities. Just a cash-flow problem caused by excesses in subprime debt, they thought.

'Move along...nothing to see here,' they said. 'We've got it all under control.'

Then, the feds came up with Plan A...they would solve the liquidity crisis by putting in cash — about $5 trillion or so. The biggest intervention ever. If it had only been a liquidity problem, that would have done the trick. But it wasn't a liquidity problem at all.

Still, the cash had an effect. The stock market started to bounce back. Then, the price of oil and commodities rose, which made things worse. Because it raised the typical household's cost of living...without providing it with more money.

Unemployment grew worse. Houses kept falling in price. Experts began to refer to the "Great Recession" and to speculate about how long it would take for a full recovery.

The feds then came up with Plan B — ultra-low interest rates, cash for clunkers, shovel-ready projects and other stimulus measures.

But it wasn't a recession either. Not even a great one. Recessions can be fixed by lowering the price of credit. Deals that wouldn't work at a higher rate become attractive. The money flows. The deals get done. The economy picks up.

But that wasn't happening. Gradually experts, commentators and average people are beginning to realize that there is something else going on. This is a period of de-leveraging. The problem with credit isn't the price of it. The Fed has been lending money at zero interest rate for more than two years. But neither businesses nor individuals seem to be in the mood. Only the government will borrow and spend.

That's when the Fed came up with Plan C — quantitative easing. If people won't borrow and spend, the Fed reasoned, we can't get money into the system through the banking system. So, we'll try something else. We'll print money and use it to buy US government debt. In effect, we'll allow the federal government to spend money without raising taxes or borrowing the money from the public. This will increase the amount of money in the system. It will be like a stealth fiscal stimulus the politicians don't have to vote on.

But Plan C didn't work any better. Instead of going down, as they were supposed to, US bond yields went up...

Meanwhile, in Europe, same alphabet. Same troubles. Even worse. There, the central bank is less willing to help. So even governments are tapped out. Lenders are afraid they won't get their money back. One by one, the fringe countries ran out of credit. And now, the countries at the core are struggling too. Last week, even Germany had trouble selling its debt.

Plan A for saving Europe didn't work. Neither did Plan B. Or Plan C. Now, poor Europe is running out of alphabet...running out of time...and running out of money too.

So, what's going on? How can you best understand what is happening?

It's a Great Correction. It is a period in which errors are corrected. What errors?

Oh...we were afraid you'd ask.

That's what we don't know. It seems obvious that it is correcting the excess debt built up over the last 50 years. In America, the private sector probably has about twice as much debt as it "ought" to have. People need to stop get rid of debt. It will take time — about 10 more years, by our reckoning.

But it's not just that. There's all the zombie build-out that the debt paid for too. That is, it's not just debt that has to go bye-bye... Jobs, businesses, assets, and whole industries have to be corrected too. Cheap finance...and all that goes with it...led people to spend more than they could afford. They caused an economy to evolve in a direction that makes little sense. How many people do you need who install granite countertops? How many electricians? How many subprime lenders?

How many foreign wars could you afford if you had to actually pay for them? How much health care? How many pensions?

Can middle-class people really afford to live in big middle-class houses 40 miles from their work? Can you really afford to make a salad in California and eat it in New York? Maybe when oil was $50 a barrel. But how about when it is $100?

The correction could be aiming for a lot more than just the economic mistakes of the last 10 years. Americans' standard of living is too high. It needs to be corrected downward.

And the rich...the 1%, God bless 'em, aren't they asking for correction too? Aren't they set up now for a double-whammy...?

The first whammy hits them when their assets go down. The rich wouldn't have this public relations problem if the feds had listened to us. The rich own stocks and other financial assets. And the feds stopped the stock market/banking crash that would have taken them down a notch. But the feds can't hold up asset prices forever. When the bear market is over, the rich will not be half as rich as they are today.

The second whammy will come from the feds...or the mobs. They'll be hit with big tax hikes. We wouldn't be surprised to see them whammed by a wealth tax. That will be Plan take money directly from the rich in order to fund the federal government's latest giveaway programs. The politician who comes up with it is almost certain to be offered a seat in Congress.

The rich will moan and whine...but they'll be lucky to escape with their lives.

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New York Times best-selling finance author Bill Bonner founded The Agora, a worldwide community for private researchers and publishers, in 1979. Financial analysts within the group exposed and predicted some of the world's biggest shifts since, starting with the fall of the Soviet Union back in the late 1980s, to the collapse of the Dot Com (2000) and then mortgage finance (2008) bubbles, and the election of President Trump (2016). Sharing his personal thoughts and opinions each day from 1999 in the globally successful Daily Reckoning and then his Diary of a Rogue Economist, Bonner now makes his views and ideas available alongside analysis from a small hand-picked team of specialists through Bonner Private Research.

See full archive of Bill Bonner articles

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